Ermenegildo Zegna: This Luxury Apparel Company Could Outperform
The Covid-19 pandemic has widened economic and social disparities around the world. To take advantage of the change in global wealth distribution, investors could either opt for securities that offer goods and services whose prices do not really follow the rise in inflation (these companies aim for a steady increase in sales volumes over time) or stocks that represent companies that sell goods and services that only a select category of customers can afford and are, therefore, indolent to any price increases.
For the second category, my first thought was high-end fashion products, so I started looking for investment opportunities in the apparel manufacturing industry. I think these businesses will perform well in the coming months, even if the next cycle will be in recession after a rise in interest rates.
As a result, I came across Ermenegildo Zegna N.V. (NYSE:ZGN), whose shares began trading on the New York Stock Exchange on Dec. 20, 2021 following a de-SPACing transaction that was successfully completed a few days prior.
On July 19, Investindustrial Acquisition Corp. (NYSE:IIAC), a special purpose acquisition company, announced the agreement with Ermenegildo Zegna Group to turn the world-renowned Italian luxury house into a publicly traded company. The deal brought in approximately $761 million in gross proceedings.
The company was founded in 1910 in Trivero, Italy by the Zegna family, who remain the majority shareholder of the company with an ownership stake of almost 66%.
Since its inception, the company has grown through acquisitions into a leading global supplier of luxury goods. The latest acquisition was Thom Browne in 2018, with Zegna buying most of the shares of the American luxury fashion brand. Sales have since doubled, leveraging factors such as brand awareness, a younger customer base and iconic collections. However, the Zegna brand is the flagship product that the group markets in the luxury casual wear and traditional formal wear segments.
Zegna's goods are sold in 80 countries through 500 stores, 296 of which are directly operated by the company.
In recent years, Zegna has strengthened its pipeline of Italian luxury textile manufacturers for the production of ready-to-wear and tailor-made clothing. In addition to its own brands, the company supplies some highly regarded luxury brands around the world.
The company's resilience was demonstrated in the first six months of 2021, when Zegna's revenue grew nearly 50% year over year to 603.3 million euros (about $712.2 million) as of June 30. This was achieved despite lockdowns and restrictions on international traffic that were still effective in some countries to slow the spread of the virus.
The Greater China region accounted for 48% of total sales, the United States 11% and Italy 14%. The remaining 27% came from other international markets.
The Zegna segment accounted for 76.6% of total sales, while Thom Browne contributed 23.4%. Year over year, Zegna was up 36% while Thom Browne increased 126%.
The adjusted Ebit was 66.8 million euros and the net profit was 28.2 million euros for the first six months of 2021, up from -52 million euros and a loss of 86.7 million euros in the first half of 2020.
The balance sheet had total cash and short-term investments of approximately 558 million euros and total debt of approximately 1.09 billion euros. The current ratio is 2.4 and the interest coverage ratio for the first half of the year is around 4. This means the balance sheet can support the short-term spending needs and the interest charges due to the outstanding debt, despite the high amount of capital borrowing.
As of the time of writing, the share price was $9.86, down 8.2% from Dec. 20, 2021, determining a market capitalization of $2.24 billion and an enterprise value of $2.78 billion.
The 52-week range is $9.22 to $12.65, and the price-book ratio is 2.82.
The financial conditions appear to be in order and the activities profitable due to a further increase in turnover and improvement in net profit. These factors should help the stock to trade higher. It may take some time as the market needs to get to know this newly traded stock, but the potential for a significant rise in share price is there. Zegna has a strong presence in China, where the market is seeing astonishing growth, which could be an additional catalyst.
This article first appeared on GuruFocus.
